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Next big hurdle in Detroit bankruptcy: State funding

While there still are many steps to take before Detroit can emerge from bankruptcy, a big hurdle will come in the next two months as the state Legislature determines if it will contribute $350 million to the city’s so-called “grand bargain” to settle its bankruptcy case.

Next big hurdle in Detroit bankruptcy: State funding

All the pieces are beginning to fall into place to complete a so-called grand bargain that will allow the city to emerge from bankruptcy, according to one of the key Michigan legislators crafting bills to consummate the state’s $350 million portion of the bankruptcy settlement pie.

“We’ve been on the sidelines waiting for one of the tumblers to move,” said state Rep. John Walsh, R-Livonia. “And now the pieces are moving, and we see that as a positive.”

The announcement late Tuesday of a tentative deal between the city and pensioners, as well as unanimous approval of that deal Wednesday by one of the pension boards, will kick the Legislature into high gear determining its role in helping the bankrupt city.

That major hurdle — a proposed $350 million from the state to the city — will be considered by the Legislature over the next two months.

“We’ve got some of the logistical stuff under way already,” said Ari Adler, spokesman for Speaker of the House Jase Bolger, R-Marshall. Bills are being drafted and will be ready to go as soon as there are some final approvals from the pension boards, unions and the courts.

Gov. Rick Snyder has proposed using $350 million in tobacco settlement money to help protect low-income pensioners and make sure the Detroit Institute of Arts collection isn’t sold off.

Among the options for the state’s contribution: issuing bonds for an up-front payment to the city that would be paid off with a portion of the $250 million in annual tobacco settlement revenues, or annual stipends to the city from the settlement. That settlement money has been used for a variety of purposes over the years, from a college scholarship fund to filling budget holes to smoking cessation and prevention programs.

Sara Wurfel, a spokeswoman for Snyder, said the governor and his administration are open either to paying any state money up front or over 20 years, as initially proposed.

But if the money was paid up front, it would be at “net present value,” she said, meaning it would be considerably less than $350 million.

The governor’s office and other parties to the negotiations will explore both options with the Legislature, she said.

A new wrinkle of possible federal participation in the grand bargain will only help the prospects of a final resolution, lawmakers predicted.

“I think it’s certainly a welcome gesture that the feds would want to assist,” said state Rep. Kurt Heise, R-Plymouth. “I’ll certainly take it.”

The federal government is discussing a deal to allow the state to divert $100 million in federal funds from a pot of money for cities hardest hit by the mortgage foreclosure crisis to eliminate blight and demolish abandoned buildings in Detroit. That diversion, which would have to get approval from the federal government and Snyder, would free up money earmarked by the city for demolition to helping solve the bankruptcy case. That money would be administered through the Michigan State Housing Development Authority.

Katie Bach, a spokeswoman for MSHDA, said she and others at the agency are not aware of any talks with the federal government about using blight relief money to aid the Detroit bankruptcy settlement.

A White House official said the feds continue to provide technical advice to the city and state on a number of topics including blight elimination: “As we’ve said, there is no bailout coming from Washington, but we continue to support the efforts by state and local officials as they work on Detroit’s revitalization.”

If the U.S. Treasury approves the diversion, it could cause some Republicans in Congress to object. U.S. Sen. David Vitter, R-La., for one, continues to push legislation that would limit or prohibit the use of federal funds to prop up cities or states at risk of defaulting on its debts — like Detroit.

“By no means should the federal government be in the business of bailing out state and local governments that are in the red,” Vitter told the Free Press Wednesday. “These governments must make hard choices and develop sustainable budgets. It is unfair to rely on taxpayer-funded bailouts.”

That legislation is unlikely to advance with Democrats in the majority in the U.S. Senate, but it won’t stop Republicans from complaining if Treasury goes out of its way to specifically help Detroit — a fact the Obama administration is well aware of.

But there will be few complaints from Michigan lawmakers if the federal government decides to help. Amber McCann, spokeswoman for state Senate Majority Leader Randy Richardville, R-Monroe, said the more people involved in a solution for the city, the better.

“The more diverse the stakeholders become, the better chance it has in the Legislature,” she said.

The state hasn’t been specifically working with the federal government for help on the bankruptcy case, said Wurfel.

“This isn’t something the governor or administration asked the White House for, or are working on,” she said. “We are open to creative solutions that may be able to come to the table, as always.”

Detroit Mayor Mike Duggan, after speaking at a New Economy Initiative event Wednesday, said he was skeptical about the proposed reallocation of $100 million to help the city.

“I don’t believe that’s real,” Duggan said. “I’ve been talking to people in Washington and Lansing today, and I don’t believe it’s realistic.”

And Walsh, who is spearheading the state House effort to craft legislation allowing for the $350-million contribution, said there has to be a thoughtful and thorough examination of what programs might suffer if the federal money is diverted.

“I’m glad to have the feds involved,” he said. “But we have to make sure we’re not robbing Peter to pay Paul.”

Democratic gubernatorial candidate Mark Schauer said in Lansing Wednesday morning the tentative agreements with Detroit’s two city pension funds are “an encouraging development,” but “very preliminary,” with “lots of steps in the process to come.”

Schauer said Snyder never should have put city pension funds at risk in the bankruptcy in the first place, because he should have taken the position that they are protected under the state constitution.

U.S. Bankruptcy Judge Steven Rhodes has said the state constitutional provision protecting Michigan pensions is trumped by federal bankruptcy law.

State Rep. Harvey Santana, D-Detroit, said the federal money will help with a crippling problem in the city.

“I’ve got mixed martial arts fighters coming in to the city to do training with young girls on how not to get raped, because they’re getting dragged into these abandoned homes,” he said. “These homes are just so dangerous to our community.”

And if getting federal money to rid the city of those homes helps facilitate a bankruptcy solution, so be it, Santana added. A sweetened deal with pensioners — police and firefighters would take no cut in their pension checks, while other employees would take a 4.5% cut to their pension payments — will help, too.

“If the retirees are comfortable with the deal, it makes the Legislature’s job easier,” he said. “This deal sounds a lot better than what was originally proposed. They’ve got to be looking at it and saying, ‘Thank God.’”

State Rep. Thomas Stallworth, D-Detroit, said the deal for current retirees looks good, but he and other lawmakers worry about the impact of health care cuts for future retirees, which are expected to come with emergency manager Kevyn Orr’s next bankruptcy plan this week.

“We cannot lose sight of what we’re doing to the active workforce,” he said. “Clearly, if they’re going to lose all their health care benefits if they don’t leave before 2015, that kind of mass exodus would wreak havoc on city services and the administration of the city.”

Approval from the retirees, who also must vote on the deal during May and June, doesn’t equate into automatic approval from the Legislature, said Heise.

“We still have to get into the details of the settlement — especially where the money is coming from — and look at the long-term restructuring plan,” he said. “Before the state commits any dollars to the city, we have a lot of unanswered questions. I think we need to take a hard look at governance structure for the DIA and Detroit Water and Sewer Department.”

And while Sen. Rick Jones, R-Grand Ledge, thinks there will be enough lawmakers on board to pass the $350-million package, he’s still a “no” vote on the issue.

“I try very hard to represent my district in mid-Michigan, and the overwhelming majority here think it’s wrong to bail out one city when there were will be 50 more cities behind Detroit with their hands out,” he said.

The House will return from its three-week spring break on Thursday, while the Senate is back in session next week. They expect to consider the state’s bankruptcy contribution before leaving for summer recess at the end of June.